CDR Mechanism: Why Failed?

Corporate Debt Restructuring mechanism popularly known as CDR was devised by Reserve Bank of India way back about 15 years ago with the good intention to help the ailing companies in revival. The mechanism theoretically was quite favourable but the practical results from this mechanism are not upto the mark. Most of the CDR cases failed miserably due to impractical approach and the focus more on correcting the lenders’ books. Rarely any restructuring was done with a fresh positive approach towards reviving the unit. The rigid approach of lenders to structure the scheme beneficial to their own books without proper understanding the real problem of the borrower was one of the major factor.  Also it is noticed that the lenders did not fulfill their commitments in time making the scheme irrelevant.

CDR Schemes were mainly advised by the subsidiaries of the leading banks who are extended arm of the lenders only. It is conflict of interest and unethical. Such agencies were only taking care of their parents and more focused towards postponing the problem. It is worthwhile to mention that these subsidiaries minted huge amount of fees in the name of restructuring. The borrowers had to follow the instructions from their lenders to give the assignments to their own subsidiaries, pay hefty fees and still no material changes in the situation.  If, some data are collected to find out how much fees was paid to the advisors, MIs, lead bankers and CDR Cell, the figure will surely mind boggling. The borrowers too were keen to postpone the problem by couple of years and could not come forward with practical solution.

It so happened that the lenders indirectly played the role of consultants where no good can be expected from the borrowers’ point of view.  Infact, this was the most crucial stage when the borrowers needed proper solution to come out of the stress but unfortunately in most of the cases, they followed the lenders’ instruction for smooth but unviable restructuring. Once the scheme failed there was no one to help the ailing borrower and finally left to finish. Ultimately, such accounts are later assigned to ARCs for wiping out. Strangely, most of the ARCs are again extended arm of the lenders.

For better performance of this scheme, following steps should have taken:

i.             Restructuring proposal / scheme to be prepared by independent agencies not related to lenders or the borrowers;

ii.            The scheme should have been approved with in a fixed time frame i.e. not more than 6 months;

iii.           The implementation of the Scheme’s agreed terms and conditions within one month;

iv.          Agencies advising in the matter should have team from all the concerned segments;

Although, now the scheme is closed but the repercussion of this will remain for years to come. In my view, the lenders should not involve themselves into any other activities just to make money at any cost. RBI should restrict the lenders from indulging into such activities which are of “conflict of interest”  as these are mostly of disadvantage for the business.

“Please note that the above views are not against any particular institutions, lender, Bank, Financial institution or borrower. Also, I do not blame solely lenders for this failure but my views are towards the system which needs to be reviewed properly.”